Some economists assert that deficit spending by governments leads to economic growth. The data says otherwise.
Cumulative Change in Net Government Debt vs Cumulative Change in GDP as a Percent of GDP, from 2007 to 2013
The graph above shows the cumulative change in government debt, as a percent of GDP, versus cumulative change in GDP, from 2007 to 2013, for selected OECD countries.
Debt as a share of GDP increased in almost all countries, with the exception of Norway. Nevertheless, the data suggest that there is virtually no correlation between the change in government debt and the change in GDP over the period. For example, Canada, Australia, Germany, and Estonia all modestly increased their net debtor positions by 6-13% of GDP. Nevertheless, their economic performance varied widely. Korea grew by 20% over the period; Estonia contracted by 5%, and GDP growth in the rest ranged from 5-16%.
The next cohort of borrowers represent those who expanded their balance sheets by 20-30% of GDP. These include Australia, France and Italy, with GDP growth ranging from -9% for Italy to 16% for Australia.
Among those with substantial increases in debt, 35-55% of GDP, the results were similarly mixed. This group includes the US, the UK and Japan. Despite this stimulus, the UK GDP actually declined, Japan remained flat, and the US, with a smaller stimulus, comfortably outpaced both of them.
Finally, Norway, with by far the most contractionary policy, saw its net creditor position increase by more than 60% of GDP over the period. Nevertheless, it grew faster than the UK or France, and essentially kept pace with Germany (bearing in mind the per capita GDP in Norway is virtually twice that of Germany). The tale of these countries suggests that the correlation between expansion in government debt (fiscal stimulus) and GDP growth is weak statistically. Indeed, the correlation is negative. The smaller the increase in debt, the better economic growth. Thus, the assertion that fiscal policy explains differences in national outcomes, while potentially true for individual countries, does not appear true for the group as a whole.